The recent decision of the Ontario Court of Appeal in
Bennett v. Bennett Environmental Inc. in certain respects
will be a comfort to directors of public issuers, and in other
respects highlights issues that should cause directors to not take
indemnification for granted. In a period of challenging markets and
increasing litigiousness the case is a reminder of the significance
of indemnity rights.
Bennett Environmental Inc. ("BEI"), a
soil removal company, publicly disclosed in June 2003 that it had
been awarded the largest soil remediation contract in its history.
In August 2003, BEI was notified that the contract would actually
be much smaller than had been originally planned. Nevertheless BEI
continued to disclose the original larger contract as part of its
inventory of contracts until July 2004, when it issued a press
release explaining the change in the size of the contract. In the
ten days following disclosure of the reduced size of the contract
the share price of BEI fell by close to 50%. Actions were brought
by securities regulators in both the United States and Canada.
The litigation arose because BEI refused to provide
indemnification to John Bennett, BEI's former CEO and director,
in connection with a settlement reached with the Ontario Securities
Commission. BEI's grounds for refusing indemnification were
that Bennett did not satisfy the indemnification test in its
by-laws (which mirror applicable corporate law) and limited cash
resources. The Ontario Superior Court of Justice ruled in
Bennett's favour, and the company appealed.
On March 5, 2009, the Court of Appeal upheld the Ontario
Superior Court of Justice's decision that Bennett is entitled
to indemnification. In so doing, the court made a number of
findings that should provide some comfort to public issuer
Onus is on the corporation – Under
applicable corporate law (which is typically mirrored in indemnity
agreements), in order for a director or officer to be entitled to
indemnification the individual must have acted honestly and in good
faith in the best interests of the corporation and, in the case of
criminal or regulatory penalties, the individual must have had
reasonable grounds for believing his or her conduct was lawful. The
court found that the company bears the burden of proving that the
individual is not entitled to indemnification; in effect, directors
and officers are assumed to have acted in good faith unless proven
otherwise by the corporation denying indemnification.
No hindsight involved – The court also
concluded that entitlement to indemnification must be analyzed
solely on the basis of the circumstances that existed at the time
of the relevant conduct. In other words, the reasonableness of the
individual's grounds for believing that his or her conduct was
lawful will not be compared to the actual outcomes.
Reliance on advice – Finally, the court
underlined the importance of professional advice. While it was held
that reliance on legal advice is not a prerequisite to prove a
director's conduct was lawful in such situations, the court
stated that the failure to obtain such advice may raise questions
and prompt a closer look into the reasonableness of the
While the court's decision in the Bennett case
offers some support for the protection provided by indemnity
agreements, it is a cautionary example of the effect on directors
and officers if issuers challenge the right to indemnity.
The content of this article does not constitute legal advice
and should not be relied on in that way. Specific advice should be
sought about your specific circumstances.
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